How your pension builds up

The LGPS is a defined benefit scheme based on Career Average Revalued Earnings (or CARE).  A CARE scheme calculates pension using the formula: 

Pension =Accrual Rate x Pensionable Pay 

In a CARE scheme, the pensionable pay for each year of membership is used to calculate a pension amount for that particular year. That pension amount is revalued each year in line with inflation (remember, CARE pensions can be reduced should there be negative inflation). These individual pension amounts are then added together to arrive at the total pension payable from the scheme. 

In the LGPS, the accrual rate for the main scheme is 1/49th. 

In the optional "50-50" scheme the accrual rate is 1/98th  (that is half of a 1/49th) - but you pay only half the contribution rate of the main scheme. 

Examples

  • Example (main scheme)
  • Example (50-50 scheme)

Example (main scheme)

Tom earns £20,000, so his pension in year 1 is worked out as: £20,000 x 1/49th = £408 

The £408 that Tom earns in year 1 is revalued at the end of the next year. So, at the end of year 2, this part of Tom's pension is £408 x 1.04 = £424 + inflation. 

Example (50-50 scheme)

If Tom opted to be in the 50-50 scheme instead of the main scheme and still earns £20,000, his pension in year 1 is worked out as: £20,000 x 1/98th = £204.

The £204 that Tom earns in year 1 is revalued at the end of the next year. So, at the end of year 2, this part of Tom's pension is £204 x 1.04 = £212 + inflation.

Where are my contributions? 

You may have previously been in a defined contribution scheme where your pension pot is based on how much contributions you pay rather than one that builds pension up as you go along and wonder where your pension pot is shown. 

Unlike many private sector pensions, your pension benefits are shown as an estimate of the annual pension you’ll be paid based on how many years you’ve worked for your employer and the salary you’ve earned, rather than a pension pot which can then be used to provide an income. Your employer also pays over twice the amount you pay in.  

The My Pension Online service and your Annual Benefit Statement show the amount of pension you have built up rather than the contributions paid.   

Although you pay pension contributions, and your employer pays contributions, the contributions are not used in the calculation of your benefits. All contributions are invested, and they help to pay for future benefits, but your benefits are based on a set formula shown in paragraph one. 

How are my benefits worked out?

Membership from 1 April 2015 

Any pension built up in the scheme from 1st April 2015 will be on a Career Average Revalued Earnings (or CARE) basis. You can take part of your pension as a tax-free lump sum, but you will have to give up some of your pension for this.

Each year from 1 April 2015 you will build up a pension of 1/49th of your pensionable pay or assumed pensionable pay (APP) each Scheme Year and this will be added to your Pension Account.

The amount of pension in your Pension Account will be re-valued every year to keep it in line with the cost of living - currently measured by the Consumer Prices Index (CPI).

If you have more than one job in the LGPS, then you will have more than one Pension Account - one for each of your jobs.

For any period you are in the 50/50 section the pension you build up will be half your normal rate.

Membership before 1st April 2015

If you have membership before 1st April 2015, you will have built up benefits in the final salary scheme. The pension you earned will be worked out as:

For membership from 1 April 2015:

 

Year 

Pensionable pay 

Pension earned 

Brought forward 

Revalued value 

2015/16 

£20,000 

£408.16 

£0 

£407.76 

2016/17 

£20,400 

£416.33 

£407.76 

£832.32 

2017/18 

£20,808 

£424.65 

£832.32 

£1,294.68 

2018/19 

£21,224 

£433.14 

£1,294.68 

£1,769.30 

2019/20 

£21,648 

£441.80 

£1,769.30 

£2,248.68 

2020/21 

£22,081 

£450.63 

£2,248.68 

£2,699.31 

The ‘Revalued value’ column is based on actual revaluation for financial years from 2015/16 to 2020/21. It is assumed that his pay will increase each year by 2% throughout. 

So, the pension for the period from 1 April 2015 to 1 April 2021 is £3,200.34 a year. 

 

Membership between 1 April 2009 and 31 March 2015: 

Pension = final pay x membership x 1/60 

Pension = £22,523 x 6 ÷ 60 = £2,252.30 a year 

 

For membership before 1 April 2009: 

Pension = final pay x membership x 1/80 

Pension = £22,523 x 14 ÷ 80 = £3,941.53 a year 

Lump sum = £3,941.53 x 3 = £11,824.59 

 

So, Bob's total benefit will be: 

Pension = £9,394.17 a year (£3,200.34 + £2,252.30 + £3,941.53) 

Lump sum = £11,824.59 

Bob can also choose to give up some of his pension for an even bigger lump sum. 

For membership from 1 April 2015:

Year 

Pensionable pay 

Pension earned  

Brought forward 

Revalued value 

2015/16 

£10,000 

£204.08 

£0 

£203.88 

2016/17 

£10,200 

£208.16 

£203.88 

£416.16 

2017/18 

£10,404 

£212.33 

£416.16 

£647.34 

2018/19 

£10,612 

£216.57 

£647.34 

£884.65 

2019/20 

£10,824 

£220.90 

£884.65 

£1,124.34 

2020/21 

£11,040 

£225.31 

£1,124.34 

£1,349.65 

The above is based on actual revaluation for financial years between 2015/16 and 2019/20 financial years. It is assumed that her pay will increase each year by 2% throughout. 

So, the pension for the period from 1 April 2015 to 1 April 2021 is £1,349.65 a year. 

 

For the membership between 1 April 2009 and 31 March 2015: 

Pension = final pay (full time equivalent) x membership (proportionate to part time hours) x 1/60 

Pension = £22,081 x 3 ÷ 60 = £1,104.05 a year 

 

For the membership before 1 April 2009: 

Pension = final pay (full time equivalent) x membership (proportionate to part time hours) x 1/80 

Pension = £22,081 (full time equivalent) x 7 ÷ 80 = £1,932.09 a year 

Lump sum = yearly pension x 3 

Lump sum = £1,932.09 x 3 = £5,796.26 

 

So, Sue's total benefit will be: 

Pension = £4,385.78 a year (£1,349.65 + £1,932.09 + £1,104.05) 

Lump sum = £5,796.26 

Sue can also choose to give up some of her pension for an even bigger lump sum.

Can I take a lump sum when I retire? 

When you retire, you can take part of your pension as a cash lump sum; this is normally paid tax free. 

  • If you were a member of the Scheme before 1 April 2009 you are automatically provided with a lump sum. 
  • If you joined after 1 April 2009 the Scheme no longer provides an automatic lump sum, but you can give up some of your pension for a lump sum. 

If you want to take a lump sum or increase the size of your lump sum you can swap £1 of annual pension to take a lump sum of £12. 

My Pension Online